New Survey Shows About 37% of Legal Cannabis Businesses in the US Are Not Profitable
Although the legal cannabis industry is currently one of the fastest-growing economic sectors in the US and worldwide, data from a new survey published by the National Cannabis Industry Association shows that many small businesses in this field are not profitable. Due to a number of factors, particularly regional regulations that restrict the operation and growth of the legal cannabis market, approximately 37% of all cannabis businesses in the US are not generating profits for their owners.
The survey included 396 private organizations from various legalized regions and territories across the country. In the end, only 43% of respondents reported that their business consistently generates a profit. Another 20% said their profits are just enough to cover living expenses and keep the business running. The remaining businesses reported that they are losing money for various reasons.
Regional Differences and the California Paradox
The business climate varies significantly across different parts of the country. Paradoxically, the highest share of unprofitable businesses was found in California, which has the largest legal cannabis market not only in the US but in the world. According to the data, about 57% of local entrepreneurs surveyed in California are losing money operating their cannabis businesses. Another 17% make just enough to keep their businesses afloat. Only 26% said their business is consistently profitable.
“Honestly, there’s nothing surprising in these results for industry experts, since the problems behind these numbers have been known for a long time,” says Beau Whitney, an analyst and owner of the consulting firm Whitney Economics. “Despite the high revenue potential in cannabis, those million-dollar figures are really only being made by large companies, which are moving toward a monopoly in the market. Small businesses, especially family farms and shops, are losing money competing with big players and the black market, as well as facing high fees and taxes from local regulators. In other words, if you don’t have at least $2.5-3 million in starting capital, your business is unlikely to succeed. And that’s just for states with mid-sized markets- in growth centers like California, Illinois, and other large states, even those amounts are pretty modest.”
Regulatory and Financial Challenges
Business owners, activists, and market analysts have long criticized the authorities in legalized states for strict restrictions on the location and advertising of legal businesses, as well as excessive fees and taxes that even the smallest industry players must pay. Combined with the near-total lack of support from major banks and insurers, small and medium-sized businesses simply don’t have effective access to financing channels that would help them weather tough times and compete with large companies backed by wealthy investors.
“We spend crazy amounts of money that could go to much better uses, just to pay for printing all the paperwork we have to submit to various regulators. Seriously, every year we use about 4 million sheets of paper just to print different forms that will end up gathering dust in archives,” says Tiffany DeWitt, owner of CannaCraft, a commercial cannabis farm in Santa Rosa County, California. “Can’t the authorities make these forms electronic, or at least subsidize these technical costs for their own bureaucracy? Along with sometimes ridiculous packaging and labeling rules, we waste a ton of resources and money on things that serve no real purpose. Honestly, with these regulations, we’re just harming the state’s environment even more by throwing away tons of paper and plastic.”
The Impact of Full Legalization and Large Producers
“Not long ago, things were different in the market. Small businesses could exist in this industry without worrying about survival. But everything changed with full legalization and the arrival of large commercial producers, who shifted the industry’s focus from product quality to mass production,” says Mike Benzinger, owner of Glentucky Farms in Sonoma County, California. “If we could get access to banks for business financing, or if we were allowed to process and sell cannabis ourselves without middlemen, we could make small cannabis businesses more resilient and profitable. However, the authorities aren’t easing regulations, despite endless requests from farmers. They’re not even rushing to lower business taxes, which has already led to a ‘tax revolt’ in some cities and counties where local governments have agreed to make concessions to businesses.”
“At least lately, the authorities have started cracking down on underground farms that flood the market with cheap, low-quality product,” he added. “While getting rid of these competitors will help us profit-wise, I doubt these measures are more practical or effective than simply lowering fees and taxes. Real tax reform would make the market much more viable.”